Great Lakes finds security in marriage with Raytheon

 - January 14, 2008, 7:46 AM

Great Lakes Aviation appears to have escaped a brush with certain bankruptcy thanks to a recently signed agreement with Raytheon Aircraft that gives the Wichita-based manufacturer a 36-percent stake in the long-foundering airline. New Great Lakes CEO Chuck Howell–added to the company’s management team on August 11 at the behest of Raytheon–now oversees an enterprise beset by near constant adversity over the past two years but seemingly rejuvenated by an unlikely benefactor.

That’s not to say that Raytheon’s investment in a company whose poor market performance prompted its ejection from the Nasdaq SmallCap Index constitutes anything more than an act of self-preservation. A growing inventory of idle Beech 1900s has sent the value of the 19-seat turboprops to historic lows; Raytheon would almost certainly have more to lose by repossessing its airplanes, thus adding to the already saturated supply of used Beech 1900s and further degrading the value of the aircraft.

Under negotiation for more than six months, the restructuring results in “significant improvements” to the Cheyenne, Wyo.-based airline’s cost structure and balance sheet and returns the company to a current status with regard to its debt obligations to Raytheon, according to Howell. Essentially, Raytheon lowered Great Lakes’ debt payments on its thirty 1994- to 1996-vintage Beech 1900Ds and two 1900Cs to more accurately reflect the airplanes’ market values, estimated by Howell at between $2.5 million and $2.7 million. In return, Raytheon gained a 36-percent equity position in the airline, although it does not control a seat on its five-member board, still chaired by former CEO Doug Voss.

Raytheon’s proviso for a “strengthened management team” led to the August recruitment of Howell, a co-founder and former chief executive of Nashville-based American Connection partner Executive Airlines. Howell served as Great Lakes’ COO while Voss and the other four board members negotiated the terms of the deal with Raytheon. Once the sides reached an agreement, Voss relinquished his CEO position to Howell.

With his new title, the Tennessee native inherits the challenge of reversing the fortunes of an airline that hasn’t turned a year-over-year profit since 1999. Losses in 2000, 2001 and the first nine months of last year forced the company to exhaust all its outside sources of working capital. Meanwhile, the company stood in arrears in its payments to all of its aircraft lenders, forcing it to reclassify all of its long-term debt into liabilities. Finova Capital, lessor of two of Great Lakes’ 30-seat Embraer Brasilias, last February filed suit against the airline for breach of its lease contracts. Great Lakes subsequently returned one of the Brazilian turboprops and agreed to pay mitigated damages over a 48-month period starting last September. The airline also agreed to resume monthly payments on the other airplane until the lease expires this October. In return, Finova agreed to withhold any action to collect outstanding debt until November 1.

Last month Howell told AIN that Great Lakes had reached settlements with all its outstanding creditors, including Boeing, lessor of another three of Great Lakes’ seven Brasilias. Last spring the company fully paid the $4.6 million owed to Coast Business Credit and severed its line-of-credit relationship with the company. Ironically, a hangar fire at Great Lakes’ maintenance hangar in Grand Island, Neb., that destroyed a pair of Beech 1900Ds–one owned and one leased from Finova–lowered the company’s long-term debt by $3.2 million. Of the total insured value of $10 million, Great Lakes applied $7.8 million to payment for the leased aircraft and the current and past-due debt and lease obligations owed Raytheon. It used some of the $2.2 million balance to replace inventory and tooling and placed the rest into general corporate funds.

Profits Will Not Come Easy
Now that the airline appears to have finally found some firm financial ground on which it could at least project the potential for profits, Howell must produce tangible results by the time his two-year contract expires. Given the difficult regulatory environment all 19-seat aircraft operators now face, and the particular vagaries Great Lakes must overcome with the bankruptcy of its largest code-share partner (United Airlines), profits will not come easy. Much depends on how well Great Lakes can parlay new Essential Air Service opportunities as last year’s increase in funding to $113 million encourages more competition from the likes of Mesa Air Group and Milwaukee-based Skyway Airlines.

Primarily a Denver-based operation, Great Lakes plans to completely abandon its shrinking hub at Chicago O’Hare by the middle of this month, leaving Oshkosh, Wis., and Waterloo, Iowa, without air service to Chicago. On January 7 Great Lakes ceded to Skyway its O’Hare-based EAS services to Manistee, Mich., and from Minneapolis/St. Paul to Ironwood, Mich. Three weeks later, on January 31, Skyway assumed responsibility for Great Lakes’ Chicago-Iron Mountain, Mich. route. Howell said he planned to move the capacity to Denver, where Great Lakes also maintains a code share with Frontier Airlines and where space constraints do not pose a problem to the extent they do at O’Hare.

An O’Hare mainstay since 1985, Great Lakes gradually lost its footing at the crowded Midwest gateway over the past few years as code-share partner United gave its slots to larger-capacity regional jets flown by Air Wisconsin and Atlantic Coast Airlines. Although Great Lakes still held out hope as late as this past summer that it could rebuild enough critical mass at O’Hare to make its services work again financially, more opportunities in Denver and Chicago’s persistent space and cost challenges soon scuttled those ambitions.

Now carrying more than 90 percent of its ASMs from Denver, Great Lakes has gradually strengthened its ties with Frontier Airlines and increased its own ticket sales since it shed the United Express identity two years ago. Over the course of a year, the portion of its revenue derived from United ticket stock fell from 92 percent to 42 percent, mainly as a result of a revised code-share deal with the Chicago-based major that allowed Great Lakes to sell its own tickets and enter code shares with other airlines. As a result, Great Lakes has reduced its exposure to losses resulting from fare cuts by United and, of course, negative developments arising out of the major airline’s bankruptcy filing.

Still, Howell does not reject the possibility that United’s desire to lower service fees it pays for turboprop capacity in Denver could open further opportunities for Great Lakes. “Depending on what shakes out during the first quarter, we believe there might be some opportunities to do some additional turboprop flying out of Denver, for both Frontier and United,” he said. “As for the United situation, short term we haven’t seen any effect. We’re just going to keep our ear to the ground and wait to hear what happens in the next 90 days.”

Meanwhile, Great Lakes will continue to feed off a steady diet of EAS work, the airline’s fastest-growing source of revenue over the past year. Compared with the same period in 2001, EAS subsidies for the nine months ending September 30 last year more than doubled, to $23.6 million, due primarily to an increase in the federal EAS subsidy budget from $50 million to $113 million. Although the company suffered a net loss of $5.1 million during the period, the increased subsidies helped cut losses by more than $10 million compared with a year earlier.